More rate cuts needed, economists say

Economists from two of Australia’s largest banks say several more interest rate cuts are needed to support the economy in 2013 as the boom in mining investment peaks.

ANZ chief economist Warren Hogan said the Reserve Bank of Australia (RBA) will need to cut the cash rate further in 2013 to boost underperforming sectors of the economy and stop the unemployment rate from moving higher.

He has forecast four interest rate cuts for the year, taking the cash rate, currently at 3.0 per cent, to 2.0 per cent.

Mr Hogan said inflation remained at the bottom end of the RBA’s two to three per cent target range, while jobs growth remained weak.

He said the economy was expected to struggle in the second half of 2013, once mining investment peaked.

‘‘All we are pointing out is that in 2013-14 the gap will be in how quickly the non-mining economy can quick up versus the mining (economy).

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‘‘I would say that the gap can only be so long,’’ Mr Hogan told a Committee for Economic Development of Australia (CEDA) forum in Sydney.

‘‘In the presence of what is already quite a soft labour market, we shouldn’t be sacrificing too much in the way of employment when inflation is low, when house prices are steady, in order to keep interest rates at some perceived level.’’

Mr Hogan said that although the RBA’s cash rate was at its equal lowest level in a generation, mortgage and term deposit rates were considerably higher.

‘‘Interest rates in our economy, if you make a broad judgement are about five per cent, that’s not dangerously low in any shape or form,’’ he said.

National Australia Bank chief economist Robert Henderson said the continued high value of the Australian dollar had offset much of the effect of the 1.75 percentage points of interest rate cuts delivered by the RBA between November 2011 and December 2012.

‘‘The lower interest rates are helping things but we think they need to go lower,’’ he told the forum.‘‘I think the high currency is a real issue and the RBA needs to cut interest rates further in order to kick some real life into the rest of the economy.

‘‘We have three more rate cuts from the Reserve Bank that takes us back to more neutral levels.

‘‘We think the RBA is going to need to cut interest rates further, we’re not too fussed about the timing. We think they are going to come in the middle of the year and then later on.’’

Mr Henderson said he believed the RBA would cut three more times this year, bringing the cash rate to 2.25 per cent.

An RBA board member and former economic adviser to Paul Keating, Dr John Edwards, agreed that the high Australian dollar was hurting parts of the economy.

‘‘That we know is having the effect of making life difficult for manufacturing exporters, life good for importers and creating some difficulties for our services exports like tourism and education,’’ Dr Edwards told the forum.

He said he was reasonably confident other parts of the economy, especially housing construction, would grow fast enough in 2013 to offset the decline in mining investment.